Mizuho Financial Group Inc (MFG) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. As has been introduced, my name is Yasuhiro Sato. I would like to express my sincere thanks to all of you for your attendance. I appreciate the great turnout.

Using the main part of the presentation material distributed to you, which is in color, I would like to discuss the financial results of fiscal year 2016, the plan for fiscal year 2017 and our thoughts for the years beyond that.

On Page 4, on the lower left, is a summary of the financial results for fiscal year 2016. As you're already aware, basically operating in a very severe environment with negative interest rates, amongst others as a result of our efforts based on our policy to drive noninterest income, we were able to overcome some of the factors negatively affecting us and accumulate noninterest income to a certain extent, but the environment surrounding us was indeed difficult.

On the other hand, the sales of cross-shareholdings which we have committed to saw a steady progress. For dividends, we maintained a payment of JPY 7.5 per share.

In the bottom half of the page, 4 initiatives for growth in the medium term are described. I will discuss them later.

Page 6 is on fiscal year '16 financial results. Since you must be familiar with the results already, I shall be brief on this. For net business profits, we accumulated noninterest income, but we were not able to sufficiently offset the impact of negative interest rates and the slowdown in the sales of investment products. Another major challenge of ours was expense reduction, which we addressed, but as it turned out, expenses overall increased. These were the trends or factors behind the net business profits for the year.

As for credit-related costs, they were within the scope of our initial plan. On net gains and losses related to stocks, as I will mention later, we overachieved the plan. As a result, although there are a few extraordinary factors involved, we were able to achieve JPY 600 billion in net income attributable to the FG. For CET1 capital ratio, in particular, we showed a steady improvement toward attaining our 10% target.

Let me discuss some of the specific aspects at this moment. The impact from negative interest rates have been projected to be approximately JPY 40 billion. The result was a little under JPY 40 billion, which is more or less on plan.

Regarding interest income, despite lack of growth in domestic lending balance, balance overseas continued to rise, although the spread there did not stop falling. The impact from the drop in Japan was greater than overseas, partly due to negative interest rates.

Noninterest income declined by JPY 23 billion in amount year-on-year, but this was in part caused by an impact of JPY 23 billion due to the strong yen. So considering the ForEx factor, it was about the same level as fiscal year '15. Given that there were large deals executed in fiscal year '15, I believe we narrowly managed to keep our noninterest income on a growth track.

On our bond portfolio, for both JGBs and non-Japanese bonds, the balance declined. Duration was under control. We believe we were able to manage it successfully in a manner that was balanced with market revenue.

Next, as I said earlier, credit-related costs were kept below the plan. The reserves were provisioned in a timely and appropriate manner. Gains from the sales of cross-shareholdings amounted to JPY 242.1 billion, including JPY 32.5 billion from ETFs. This demonstrates that the unwinding of cross-shareholdings that we have promised is successfully underway.

For non-Japanese yen funding as well, the foreign currency loan-to-deposit ratio has improved by 5% year-on-year. Looking at the actual amount of U.S. dollar availability, I think we can say that we have built very good relationships with our customers.

On BIS capital ratios, as I said earlier, we are making steady strides toward achieving a CET1 ratio of 10%.

Next on the progress of the mid-term business plan. Here are the numbers that we have committed to in the plan. To take a look at several of them, our CET1 ratio is approaching 10%. The disposal of cross-held shares completed in the last 2 years were JPY 275.3 billion against our plan of JPY 250 billion. According to the plan, we are to achieve JPY 550 billion in the sale of cross-held shares by the end of March 2019. Although it is not written on the slide, we are excited to dispose another JPY 141.8 billion by the end of this fiscal year, suggesting that we are proceeding toward the JPY 550 billion target at a comfortable pace.

The proportion of noninterest income is to be raised to 60% in fiscal year 2018. Unfortunately, in fiscal year 2016, it was sold and did not improve. The largest factor behind this was the sales of investment trusts and insurance products, which did not grow as expected. But I do not believe that a change to the plan to raise the noninterest income to a share of 60% of the total is not warranted.

The largest issue for us is the expense ratio. The expense ratio target under our mid-term business plan is around 60%. So the question is, how we're going to bring the current ratio of 66% to about 60%, which I will discuss later.

These are the KPIs set under the medium-term business plan. Rather than explaining all of them, I will just mention the ones still with some problems. Here is the ECM or the amount of equity underwriting, our target is to become #2. We were ranked fourth in fiscal year '16, unfortunately, as it became clear from our analysis 2 out of the firms at the top in the ranking have one-off extraordinary factors. I'm not suggesting that this justifies our standing. So we must solidify the foundation of this business as we work toward achieving the second position.

Another point I would like to highlight is the overseas noninterest income. As I will describe later, in the measures we are taking to reinforce our top line revenue, I believe DCM has much room to grow.

(inaudible) explained, the sales of publicly-traded investment trusts dropped substantially in fiscal year 2016 partly due to market conditions. As we see the trend from savings to investment at Mizuho centering around Asset Management One, we are focusing on the sales of products from a long-term perspective with a potential to create a full-fledged shift away from savings to asset building.

Granted that the decline in fiscal year '16 was caused mainly by market conditions, one of the greatest remaining challenges we must tackle is to lift this in fiscal year 2017 and '18.

On to the next page. This is the earnings plan for fiscal year 2017. The target for net income attributable to the FG is JPY 550 billion, down by JPY 53.5 billion year-on-year.

Compared to fiscal year 2016, there are 2 major extraordinary factors that are no longer going to benefit us this fiscal year. One is the profit from the integration of the Asset Management One that we had in fiscal year '16 and the other is the profit arising from the organizational change in the securities business, each amounting to JPY 56 billion and JPY 40 billion, respectively. These are going to disappear this fiscal year.

On top of that, under this year's plan, in view of the recent situation surrounding interest rates, trading revenue target is estimated quite conservatively and in principle that impact is to be offset by the growth in the consumer group business.

As I will elaborate later, expenses shown here must be brought under better control, and the plan for expenses this fiscal year is JPY 32 billion.

With other items such as the sales of equities, the plan that we set for this fiscal year is JPY 550 billion. The target for fiscal year '18 is the earlier JPY 600 billion. As I will tell you in a few moments, it means without saying that achieving the JPY 550 billion this year is a must, but I believe the bigger challenge for fiscal year '17 is to ensure that projects that would lead to growth in fiscal year '18 firmly take root in fiscal year '17.

Next regarding the plan for each in-house company. Comparisons by company are given. The fiscal year '17 plan is shown vis-à-vis the actuals in fiscal year '16. For RBC, middle market and SMCs (sic) [SMEs] as well as retail business are projected to grow year-on-year. And this is relevant to what I was talking about earlier on the sales of investment trusts and asset management, which will be mentioned later.

As is on Page 27, Mizuho boasts the largest increase in the amount of inflow of SC client assets among all the security peers in the industry. The amount increased by JPY 1.4 trillion year-on-year, although, unfortunately, it is not fully reflected in either revenue or the profit and loss because of the market conditions.

This number is excellent compared to our competition, and we also expect our investment business to grow a little more and that RBCs expense reduction, including branches to advance as well. Therefore, we believe that these year-on-year changes can be met this fiscal year.

To mention another point, which is on CIC, or large corporate business, in fiscal year '16, we made an investment, which generated a large amount of revenue due to certain major factors, but because we have sold a substantial part of our stake since then, we are expecting the dividend income we are receiving to fall, including that we have planned a year-on-year decrease conservatively.

On market trading, on the other hand, based on the thinking that setting a large number would be risky in view of the current market environment, we have basically drawn up a conservative plan.

By taking a look at the breakdown, you will see that sales and trading is estimated to increase markedly, indicating that the foundation of this business over the medium term is being established.

The next page is on initiatives to control the balance sheet. I don't think we need to spend too much time on this either. But just on one aspect, which is lending, as I will discuss this further later, we are looking to strengthen the steps to improve the risk return and the turnover assets.

On deposits, as I said, we must accelerate the shift from savings to investment, expand the balance of the investment products and take a unified approach. All of these are already underway, but by accelerating the efforts, we want to bring the overall balance sheet under better control.

This is on capital management, which has not changed. With a view to maintaining a consolidated dividend payout ratio of 30%, we would like to ensure a stable dividend payment to our shareholders and thus wish to make a commitment to keep the dividend per share at JPY 7.5.

Next is on IT systems. There have been some press reports on this. Our intent has been to develop IT systems with a large weight on robustness and accuracy.

That has taken up extra time in comparison to the historical plans, as I explained last November. As of today, we are just one step away from achieving what's been exactly formulated in the revised plan.

As we continue with the plan, we are being very confident about the completion. The process is that once the development is completed, user acceptance tests will be conducted and the transition will finally start. The quality of the systems is rigorously being checked and verified so much so that when the next-generation IT systems are fully built, Mizuho's operations and systems efficiency will be more than adequate to accommodate future changes, such will be the nature of our future systems framework.

So far I presented on fiscal year 2016 and '17, but next, I would like to share with you the direction that Mizuho seeks to pursue over the medium- to long-term or to put it differently, the areas I see as major issues based on the financial results of fiscal year '16.

As I explained extensively so far, we have decided to further advance the One MIZUHO strategy under the medium-term business plan. And based on the awareness of the environment around us, launched 5 basic policies. Today, the uncertainties in the environment are becoming greater and driving gross profits is made even more difficult compared to then.

Conversely put, to keep the bottom line, our understanding is that reforming the expense structure is becoming increasingly imperative now. With that awareness in mind, following the 5 basic policies, we must try a few new things in the future. In that regard, as I said earlier, albeit it is given that revenue for fiscal year '17 must be secured, in a sense, fiscal year '17 is going to be an extremely crucial year in laying the foundation for the reform to be initiated in the coming fiscal years 2018, '19 and '20.

The direction is threefold. One is to strengthen cost competitiveness. I will mention several things on this. The second is the top line, for which we will have to start taking actions and shifting existing resources and coming up with ideas on what to do in the white space. Lastly, HR management or utilization of personnel. Let me explain in terms of these 3 areas.

On this page, I will talk about the augmentation of cost competitiveness. This shows the overall plan for the expenses. We have been implementing operational excellence initiatives since fiscal year 2016. And the impact derived from that in fiscal year 2016 was JPY 12 billion, JPY 23 billion this fiscal year and another JPY 35 billion in fiscal year '18. We are committing to achieving a cumulative effect of JPY 70 billion by the end of fiscal year '18.

For this effective JPY 70 billion to be reaped, already over 200 specific ideas or actions are drawn up and rolled out in the field. So the rest is to execute these very thoroughly on the ground. Having said so, is this JPY 70 billion alone going to be enough to help us achieve the 60% target? Perhaps not, considering there may be a downside possibility to the top line growth. Not likely to be sufficient for the 60% we are aiming at.

That is why we will establish a structural reform task force to implement a new and drastic structural reform, perhaps not much of this will be translated into net effect in fiscal year '17 right away. The amount saved may not initially be all that large in many areas, but what is important is that we are aiming to have the plans and the concrete initiatives for the coming years in fiscal year '18 and '19 to be determined and that in fiscal year 2020, a cost reduction effective JPY 100 billion to be realized.

Next page, please. Let me explain a few key points. One is, revisiting branch strategies. As we have announced already, we will establish this hub-and-spoke model. Banking, trust and securities have approximately 800 branches, which will be integrated into approximately 120 areas, and brand strategy will be developed for each area.

ROE is calculated for each area. We will separate hub branches from spoke branches that will use the hub branch functions and switch to hub-and-spoke model for the 120 areas.

Mizuho has promoted banking, trust, securities joint branch structure, which will be promoted further. Therefore, we will have integrated branches. And there are a few different ways of thinking on the number of branches, but in terms of the number of physical branches, we can reduce it to 1/3 by establishing banking, trust, securities joint branches.

We plan to cut the total number of branches by deploying such branch model. Furthermore, this hub branch will provide full banking, trust, securities as well as wholesale and retail services through face-to-face channel. On the other hand, spoke branches will not have all the functions. So they will focus on consulting services as satellite branches and promote our business in collaboration.

In some cases, we will utilize digital channel in spoke branches and introduce the hub branches functions using virtual devices in order to achieve a good balance between gross profits increase and cost reduction.

However, we must also harmonize omni-channel face-to-face and digital channels using technology, so we will improve operational efficiency using technology, especially for a traditional bank operation functions, such as remittance, deposit or account opening, we will proactively leverage this technology to improve efficiency.

Revisiting our branch strategy consists of 2 factors: hub-and-spoke and omni-channel structure. We are still studying the actual pace of reduction and what we do by when, but plan to develop a concrete plan soon. This is also on efficiency. We plan to utilize technology for our own operational efficiency. One is operations reform utilizing blockchain, where we conducted proof-of-concept with Fujitsu. We completed the proof-of-concept on cross-border settlement and will roll it out. The other trade settlement has been rolled out by some participants. This is being promoted with IBM and R3 under a different format. We think we can improve our costs significantly using such technology, especially blockchain technology.

The other operations reform utilizes RPA robot, which is more an internal operations reform. It is a technology using a robot called robotic process automation, which automates standard operations conducted manually in order to use our manpower more efficiently, reduce time and improve quality.

We are introducing this in some areas and starting to use this robotics in all possible business areas through this process. It is too early to quantify the overall cost reduction from this, but we hope to be able to explain the timing and the amount as soon as possible.

The next stage is on the streamlining of our organization, which will be done in 4 phases this year. One is head office reform. We will downsize the head office operations by shifting manpower from the head office to the front line accelerating the decision-making, which is a governance matter and delegating authority to the front line, as we have done in the past under operational excellence.

We will also tackle group company reform starting this year, which we could not address until now. We plan to centralize standard operations and shift to shared services in order to improve efficiency and reduce costs.

Regarding organizational reform outside Japan, overseas development previously focused on the profitability of each branch. But going forward, we will work to remove duplicate operations and organizations. We plan to proactively pursue optimum allocation to remove duplicate operations and organizations, including the areas we could not address up to now.

Lastly, we must fully acknowledge the Banking Act revision. According to our discussion with FSA, standard operations will be centralized for sure by establishing standard operations company under the holding company. As we already have the management structure centering on a holding company ahead of our peers, we plan to quickly promote this centralization based on the revised Banking Act.

I talked about the next-generation IT system earlier, but this is not the next-generation system. It is a structure reform of the current system and process reform in order to make it fast and at low cost to help develop our system going forward. We are promoting this reform using AI, Big Data and robot and think we have big room for efficiency improvement.

Next is our top line. I mentioned earlier that the current environment makes it difficult for us to grow our top line. The key is what we can do by promoting our One MIZUHO strategy. One is the shift of management resources to focused areas based on business portfolio analysis. When we started our medium-term business plan last year, we developed a quadrant on market attractiveness and competitive advantage and clarified our areas to focus and streamline or revisit.

Based on quantitative and qualitative evaluation, some areas to streamline, revisit and focus have been decided in the board meeting. We will execute them thoroughly in fiscal year '17 and '18. Risk-weighted assets will move to focus area as well as approximately 1,000 headcounts. Such structural reform that we started will continue going forward.

Next is further strengthening of noninterest businesses, the core of our One MIZUHO strategy, and I will talk about promoting initiatives related to shift from savings to asset building and consulting business promotion toward SMEs.

Balance of the investment product is increasing strongly as shown here. We also track the number of customers referred to securities from bank, which is the most obvious number showing our bank securities collaboration. Cross-selling of customers between bank and securities have been progressing significantly in fiscal year '16 and before, which is unfortunately not clearly shown in the revenue numbers due to the market environment, but contribute greatly to our revenue depending on the environment.

Net inflow of securities clients assets for fiscal year '15 and '16 are shown here. Mizuho Securities is much ahead of our peer group. This is because we are finally exerting our functions as one securities firm after merging 3 companies. And above all, thanks to the penetration of One MIZUHO strategy. We plan to integrate the largest product line of Asset Management One and further increase noninterest income by promoting the initiatives to shift from savings to asset building.

Next is consulting business promotion toward SMEs. This shows the ideal business trend. We won the top position in IPO last year. This was achieved thanks to positive outcome from the structure where we can provide the SMEs with direct consulting, leveraging our industry expertise and various financial know-how backed by the branch strategy and research and consulting or the fifth pillar mentioned earlier.

In other words, noninterest income base with SMEs is being established as shown in SE reconsulting project won via referral from BK and SE-arranged IPOs where TE (sic) [TB] acted as a stock transfer agent.

We want to strengthen this further by shifting our manpower from the head office to the frontline, as I said earlier.

Next is on group-wide collaboration. We are committed to strengthening our position in the debt market. We became one of the top 10 in the U.S. This is investment-grade corporate bond ranking. And we are fifth among the best customers with single A and above that we target. Of course, RBS acquisition contributed to this. In other rankings, Mizuho was mostly first in debt categories. MUFG was fifth, one step ahead of our 6, in global syndicated loan, but we are still one of the highest ranked among the Japanese banks.

Another is sector-based business promotion structure, which started this year. We had a serious discussion whether to establish global corporate company when the in-house company system was introduced. Some insisted that we should think of the company as one entity rather than separating global and domestic as large companies are global. This is philosophically true, but our structure was lagging behind.

Starting this year, especially in these industries, we are promoting acquisition finance and advisory where domestic securities and banks RMs or sector-based coverage collaborate with overseas IB coverage. This year is CFAS in the U.S. or RMs. This is developing not only in the U.S., but also in Europe and Asia. So we want to expand our noninterest income business in these areas.

Next is the so-called white space or new businesses. As you know, Managing Executive Officer Mr. Daisuke Yamada became the full-time Chief Digital Innovation Officer. He will be dedicated to this task. The conventional digital innovation team was reorganized and Mr. Yamada will lead the innovation in this structure under my direct control. We discussed this extensively and decided to take it outside the company as we doubted that entrepreneurship could take root in the bank culture and believed that the true technologies emerge only in open innovation.

We built a new platform WiL, a new company with Dai-ichi Life, Itochu and our client shareholders. This is an IOT incubation company. So it will have a few seeds that will grow. And the bank or the group will generate financial revenue on this growing company.

We created a new company with a strong belief that it cannot be in incubation if we try to take this inside Mizuho. J.Score will start advertising in June, so please take a look. As explained earlier, this is Japan's first core-based lending business. So I hope you could find it useful.

Regarding settlement, a new e-money issuance is launched ahead of our peer group. I strongly believe that our learning phase is over and that it is important to roll out these technologies even if we fail somewhat along the way.

Next is HR management reform, which I will skip, as it was explained to you the other day.

ESG initiatives. Page 35 shows ESG-related recognition and awards. We are participating in these initiatives and are included in ESG-related indices shown here. And these include inclusions we are recognized as good company in these areas. We are committed to enhancing ESG further. So let me give you some concrete examples on the next page.

We have had this governance structure all along, and the biggest change was the transformation into a company with 3 committees. In 2014, we established an advanced governance structure back then where Chairman of the Board of Directors as well as all members of the Nominating and Compensation Committees became independent outside directors. We also introduced in-house company system. And starting this year, independent outside director became the Chairman of the Audit Committee, so now the Chairman of all legally required committees are independent outside directors.

Please skip to Page 38. My last point is on fiduciary duty. FSA is taking various key initiatives, but we already announced our policies regarding fiduciary duty as the first mega-bank in February 2016 based on the assumption that Asset Management One will be established.

We were, again, the first as the Japanese mega- bank to establish Fiduciary Duty Advisory Committee on the group basis. These governance and systems do not necessarily generate revenue per se, but we are committed to improving our governance that is necessary and important for us to grow in the medium- to long-term as a frontrunner in the field.

This concludes my explanation. I'm sorry for being a bit long. Thank you very much for your attention.